Discussion
The life blood of any economy is international trade as it ensures that the requisite goods are services are available in a timely manner in sufficient quantity. Further, it also helps the nation in deriving revenues which then can be used for public welfare. Trade is particularly imperative for Australia considering the vast mineral wealth of Australia which has very limited local use considering the lackluster contribution of manufacturing to the economy. As a result, it becomes essential to track the prices of imports and exports and thereby understand the impact of the same on economy. Also, it needs to be analyzed as to why a particular price trend maybe observable especially with reference to the trade partners. The objective of this report is to address the above issues in light of the available price data for exports and imports during the time period 2000-2015.
In accordance with the extended data, the various mathematical operations have been performed in order to obtain the relevant changes in import and export price over the given period.
- The annual indices concerning imports and exports prices have been constructed considering the quarterly data that has been extended. This has been expressed in the tabular manner shown below.
- It would be apt to represent the above tabular data through the medium of line graph which would perfectly capture the fluctuations of import and export prices over time. While, choosing a bar chart or a column chart would have been possible options but for those cases, the dynamics would not be so clearly visible as in case of a line graph. This is drawn using Excel and highlighted below.
- In relation to exports prices, a trend is visible whereby during 2003-2008 whereby there is an increase in the price which is halted by the onset of the global financial crisis which adversely impacted the demand for various products and services and thus led to declining prices. However, post the GFC, there has been a spike in the export prices but it has not transformed into a trend as it lasted only till 2011 and after that there has been a steady decline in the exports prices which would adversely impact the $ exports.
With regards to imports prices, the key observation is that underlying volatility is significantly lesser as compared to that observed in case of exports. The import prices seems to have peaked out in the year 2001 post which they witnessed a decline till 2004. The trends from 2004 to the onset of financial crisis remained choppy as there was no clear pattern which was visible. During the crisis, the import prices witnessed a decline but there are increasing since 2011.
The trends observed above may be explained by taking into account the alterations in not only the trade partners but also the underlying goods and services traded. Before 2009, Japan used to be the Australia’s most prominent trade partner but then China dislodged Japan from this position and has been the biggest trade partner for Australia ever since. It simultaneously occupies the distinction of being the largest importer and exporter to Australia. (OEC, nd).
The exports from Australia consist of commodities that includes minerals (iron ore, coal, gold, uranium) besides commodities derived from agriculture and livestock (bovine meat, wheat, wool etc.) (DFAT, 2015). As a majority of the export revenue for the nation is derived from commodities, thus there is higher price volatility as commodity prices tend to show high degree of fluctuation in accordance with the global demand and supply forces. The export price increase observed in the early 2000’s continuing till 2008 was essentially led by a surge in the prices of various minerals particularly coal and iron ore. Besides, as global economy was booming during this period, thus there was demand led food inflation which led to the surge in prices of various commodities derived from agriculture. However, the prices of various metals and minerals has seen a progressive decline since 2012 which is closely linked to slowing growth in China that is responsible for the decrease price of the various commodities as it is the largest importer of these mineral ores. The net impact of this has been witnessed in the fall of the exports in the recent times. The manufacturing exports from Australia are minimal as comparative advantage of Australia lies in export of various commodities coupled with services. In context of services also, education is the main export while other exports are relatively lesser as the prominent markets are vey far from Australia.
Conclusion
In context of imports, the prominent items are telecom equipments, computers, transport equipment, office machines, commodities coupled with high engineering precision tools (ABS, nd). From a first look, it is apparent that the unlike exports which are essentially raw material based, the imports are capital goods. Considering the nature of goods, the prices of the same would not fluctuate very high deal. Besides, the changes in production pattern of these items are brought about by alternations in the various costs of production rather than the demand and supply functions. When the global financial crisis struck, there was a decrease in the key inputs involved in the manufacturing of various capital goods which led to a decrease in the prices during 2009-2010. But the price again shot up as the global economy showed recovery and demand enhanced and this is responsible for the increasing price trend noted in the recent times.
In the last decade or so, the mining business has flourished on the back of China led demand and the contribution of the sector to the Australian economy and exports in general has seen a significant hike. However, In the last four years as the price of various commodities is plummeting on account of tepid demand from China, the mining sector is being adversely impacted and is also impacting the economy negatively (Westerman and Creagh, 2015). However, in wake of the nature of exports from Australia, the various businesses engaged in theses should be prepared for these periods of subdued profitability considering the cyclical nature of the business. It is advisable that companies must keep some money aside when the commodity prices are high so that they can cope up with the potential losses when the prices do fall as it is an inevitable part of the commodity business. Additionally, it makes sense for the businesses to loo for alternative customers both domestically and internationally so as to avoid dependence on a particular client or nation.
Even the government and the economy would be impacted by the prices of the exports and imports. The sharp fall in the commodity prices recently witnessed has had a deep impact on the public finances considering the contribution of the mining sector to the exports and economy in general. As a result, the government is facing the issue of increasing budgetary deficit on account of underperforming exports coupled with lower tax collections impacted by dampened profits. As a result, it makes sense for the government and businesses alike to look at means of diversification so as to reduce the dependence on a particular sector only while taking proactive measures at debt management.
Conclusion
The discussion above clearly reflects on the compositional difference for exports and imports of Australia. These compositional differences can offer credible explanation for the trend witnessed in the data. The price fluctuation of exports in high since it is dominated by commodities unlike imports which have lesser fluctuation as these have high representation of capital goods. The imports witnessed a price decrease during the financial prices but have increased in the post GFC period. The recovery shown by exports index in this regard was rather short-lived and since 2012 there has been a falling trend led to crashing commodity prices led by slowdown in China. Thus, it si required that there should be better preparation on behalf of the businesses along with government to cope up with the fluctuations in price and their impact on the economy.
- Covariance (X.Y) = 189.32. Correlation Coefficient (X,Y) = 0.14
- From the data above, it is apparent that the variables X and Y tend to have a positive relationship even though the same is weak as indicated from the above two parameters.
Taking into consideration the above output, the equation of the regression line is mentioned as follows.
Y = 3348.673 + 140.355X
R2 is 0.0206 which is indicative of the fact that the independent variable X is capable of explaining only 2.06% of the changes seen in the dependent variable Y.
References
ABS n.d., International Trade, [Online] Available at https://www.abs.gov.au/International-Trade [Accessed May 17, 2017]
DFAT 2015, AUSTRALIA’S TOP 10 GOODS & SERVICES EXPORTS AND IMPORTS, [Online] Available at https://dfat.gov.au/trade/resources/trade-at-a-glance/pages/top-goods-services.aspx [Accessed May 17, 2017]
OEC n.d. Australia, [Online] Available at https://atlas.media.mit.edu/en/profile/country/aus/ [Accessed May 17, 2017]
Westerman, H. and Creagh, S. 2015, China economy to slow, hurting Australia: IMF, [Online] Available at https://theconversation.com/china-economy-to-slow-hurting-australia-imf-40150 [Accessed May 17, 2017]
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